David Bell: Working out how to split financial burden would be no easy task

Between now and the independence referendum, the debate on self-rule will range from ethereal discussions of Scottish identity to the deeply mundane.

Few issues are less likely to set the heart racing than the allocation of the national debt between Scotland and the rest of the UK. But it is vitally important: the size of the debt determines the interest payments that would have first call on Scottish taxes each year. More debt means less to spend on health, local authorities and universities.

UK central government debt was 1.09 trillion in 2010-11. By 2015-16, even with the current tax increases and spending cuts, the Office of Budget Responsibility forecasts it will have risen to 1.52tr. By then, UK government debt will be equivalent to 69 per cent of GDP, up from 29.7 per cent in 2001-2. Debt interest payments will rise from 43 billion in 2010-11 to 66.7bn in 2015-16. It could be worse: in the past few weeks, US government debt exceeded the size of its GDP. In 2009-10, the US was spending $413bn on interest payments.

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So what would Scotland's share of the UK debt be? There is no unique answer to this question, but there are positions. And, of course, the creditors would have an interest in the allocation, as their ultimate concern is the return of their loan capital. Scotland would have to convince the markets of its soundness as a debtor.

A starting position would be the argument that the public spending which debt enables equally benefits all citizens of the UK. Therefore, the share of the debt allocated to Scotland should be its population share.

Scotland accounts for 8.4 per cent of the UK population and, therefore, would account for the same of the debt. This would be 91.5bn in 2010-11, rising to 127.9bn by 2015-16. Scotland's debt interest bill would rise from 3.6bn in 2010-11 to 5.6bn in 2015-16.

This method of calculating debt and debt interest is used by civil servants putting together the Government Expenditure and Revenue in Scotland (Gers) reports. Another approach that was suggested in Quebec was to allocate debt by an area's contribution to GDP. The most recent estimates put per capita Scottish GDP at 98.8 per cent of the UK average. So this method would give much the same answer as the population share.

The Institute of Economic Affairs wants to link debt attribution to government spending in Scotland. In 2009-10, Scotland accounted for 9.2 per cent of identifiable UK public spending. A 9.2 per cent share of the debt would increase its 2010-11 value to just over 100bn.

This is only slightly more than its population share and does not take account of the other side of the balance sheet - revenues. If Scotland contributes more than its population or GDP share to revenues, then there should be no problem in having relatively high spending. The same must be true in London, where public spending in 2009-10 was 2.4 per cent higher than in Scotland. Of course, Londoners would argue they contribute much more to the UK Treasury than they take out and, therefore, it would be unfair to use spending alone as a mechanism for allocating debt.

The same argument can be made in Scotland. Oil revenues are critical to the case for cutting the Scottish debt below its population share. Between 1981-82 and 2008-9, North Sea oil revenues from Scottish waters raised 130.3bn for the UK Treasury. This is a massive sum in relation to Scotland's debt based on population share. But it is not clear there is legal precedent for taking it into account. And in the negotiations over debt, the UK government might press to go further back than 1981. It might even ask for the 398,085 10s handed over at the time of the Act of Union to compensate for the losses Scots incurred in the ill-fated Darien Scheme. One thing is clear - if we do go down this route, it will be a very long time before a settlement is agreed.

l David Bell is professor of economics at Stirling University.